Introduction
The purpose of this ISA is to establish standards and provide guidance on the auditor’s use of external confirmations as a means of obtaining audit evidence.
The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion level.
It indicates that, while recognizing exceptions may exist, the following generalization about the reliability of audit evidence may be useful:
- Audit evidence is more reliable when it is obtained from independent sources outside the entity.
- Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.
- Audit evidence is more reliable when it exists in documentary form.
- Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles
External confirmation is the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting assertions in the financial statements or related disclosures.
External confirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. The following are examples of situations where external confirmations may be used include the following:
- Bank balances and other information from bankers.
- Accounts receivable balances.
- Stocks held by third parties at bonded warehouses for processing or on consignment.
- Property title deeds held by lawyers or financiers for safe custody or as security.
- Investments purchased from stockbrokers but not delivered at the balance sheet date.
- Loans from lenders.
- Accounts payable balances.
Assertions Addressed by External Confirmations
External confirmation of an account receivable provides reliable and relevant audit evidence regarding the existence of the account as at a certain date.
Confirmation also provides audit evidence regarding the operation of cutoff procedures. However, such confirmation does not ordinarily provide all the necessary audit evidence relating to the valuation assertion, since it is not
practicable to ask the debtor to confirm detailed information relating to its ability to pay the account.
Similarly, in the case of goods held on consignment, external confirmation is likely to provide reliable and relevant audit evidence to support the existence and the rights and obligations assertions, but might not provide audit evidence that supports the valuation assertion.
Design of the External Confirmation Request
The auditor should tailor external confirmation requests to the specific audit objective. When designing the request, the auditor considers the assertions being addressed and the factors that are likely to affect the reliability of the confirmations.
Factors such as the form of the external confirmation request, prior experience on the audit or similar engagements, the nature of the information being confirmed, and the intended respondent, affect the design of the requests because these factors have a direct effect on the reliability of the audit evidence obtained through external confirmation procedures.
Use of Positive and Negative Confirmations
A positive external confirmation request asks the respondent to reply to the auditor in all cases either by indicating the respondent’s agreement with the given information, or by asking the respondent to fill in information
A negative external confirmation request asks the respondent to reply only in the event of disagreement with the information provided in the request.
Management Requests
When the auditor seeks to confirm certain balances or other information, and management requests the auditor not to do so, the auditor should consider whether there are valid grounds for such a request and obtain audit evidence to support the validity of management’s requests. If the auditor agrees to management’s request not to seek external confirmation regarding a particular matter, the auditor should apply alternative audit procedures to obtain sufficient appropriate audit evidence regarding that matter.
If the auditor does not accept the validity of management’s request and is prevented from carrying out the confirmations, there has been a limitation on the scope of the auditor’s work and the auditor should consider the possible impact on the auditor’s report.
Characteristics of Respondents
The reliability of audit evidence provided by a confirmation is affected by the respondent’s competence, independence, authority to respond, knowledge of the matter being confirmed, and objectivity.
The External Confirmation Process
When performing confirmation procedures, the auditor should maintain control over the process of selecting those to whom a request will be sent, the preparation and sending of confirmation requests, and the responses to those requests. Control is maintained over communications between the intended recipients and the auditor to minimize the possibility that the results of the confirmation process will be biased because of the interception and alteration of confirmation requests or responses.
No Response to a Positive Confirmation Request
The auditor should perform alternative audit procedures where no response is received to a positive external confirmation request. The alternative audit procedures should be such as to provide audit evidence about the assertions that the confirmation request was intended to provide.
Causes and Frequency of Exceptions
When the auditor forms a conclusion that the confirmation process and alternative audit procedures have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should perform additional audit procedures to obtain sufficient appropriate audit evidence.
In forming the conclusion, the auditor considers the:
- Reliability of the confirmations and alternative audit procedures;
- Nature of any exceptions, including the implications, both quantitative and qualitative of those exceptions; and
- Audit evidence provided by other audit procedures.
Evaluating the Results of the Confirmation Process
The auditor should evaluate whether the results of the external confirmation process together with the results from any other audit procedures performed, provide sufficient appropriate audit evidence regarding the assertion being audited.
External Confirmations Prior to the Year-end
When the auditor uses confirmation as at a date prior to the balance sheet to obtain audit evidence to support an assertion, the auditor obtains sufficient appropriate audit evidence that transactions relevant to the assertion in the intervening period have not been materially misstated. Depending on the assessed risk of material misstatement, the audit or may decide to confirm balances at a date other than the period end, for example, when the audit is to be completed within a short time after the balance sheet date. As with all types of pre-year-end work, the auditor considers the need to obtain further audit evidence relating to the remainder of the period. ISA 330 provides additional guidance when audit procedures are performed at an interim date.
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